Neil Merrick 19 March 2018

The long road to rates retention

The long road to rates retention image

Changing local government finance is never easy - but the challenge of giving councils more control over business rates is proving trickier than most.

It did not help that Theresa May called a snap general election last year, so scuppering a bill that would have paved the way for 100% retention of business rates by local authorities in England.

A third set of pilots is due to start next month [APRIL], but it is tempting to think that 100% retention, initially promised by 2020, may not happen for some time.

Joanne Pitt, policy manager at the Chartered Institute of Public Finance and Accountancy, (Cipfa) says the principle of self-sufficiency built around councils keeping all business rates is overwhelmingly welcomed throughout local government. 'As with any change, it’s not without pain,' she adds.

At the heart of the problem is the complexity of the business rate system, which reflects a desire for fairness as well as to incentivise economic growth.

Since 2013-14, councils in England have in theory kept 50% of business rates although the exact sum retained depends on a system of tariffs and top ups based on local need. Far from retaining all business rates by the end of this decade, the best councils can now hope for is to keep 75% from 2020/21.

Pilots based on 100% retention began in Cambridgeshire and Greater Manchester in 2015. Further pilots were launched last spring, mostly in other city regions. While councils involved keep all business rates, they in effect only benefit from growth in business rates as they lose grant equal to the money previously raised from businesses.

Councils taking part in pilots are guaranteed they will not be any worse off. But while the 2017 pilots have been extended for a further year, information has been limited, along with scope for much experimentation.

Cornwall, a unitary authority, is about to go forgo revenue support grant (RSG) and three highways capital grants for a second year in return for keeping all business rates. In 2017/18 it expects to raise £150m, including £6m in growth.

Andy Brown, service director for resources, says the pilot gives Cornwall greater flexibility as it can spend more on highways revenue programmes instead of just capital work. 'There is more focus on business rates as income generation,' he adds.

Councils taking part in pilots do not have power to increase or cut business rates beyond what was available before. Parliamentary approval is needed before mayors in combined authorities can adjust business rates, while legislation must also precede councils retaining 100% on a permanent basis.

John Fuller, vice chair of the Local Government Association’s resources board, says the pilots are allowing councils to develop the best model for retention from a 'bottom up' perspective. 'The whole premise of business rate retention is that councils know much better than central government how to grow their local economies,' he says.

Key issues to be determined are:

  • Which government grants should be reduced or abolished once councils raise more money locally?
  • How should income from business rate growth be divided up in areas where there is more than one local authority?
  • To what extent should revenue from business rates still be redistributed nationally?

In Greater Manchester, £6m of the extra £12m collected in 2017/18 by Manchester City Council is being handed to the combined authority.

Most of the ten pilots starting in April are in two-tier areas, meaning more councils must decide how income is split. James Maker, head of policy at the County Councils Network (CCN), says most see investment in strategic infrastructure as the best way to encourage economic growth.

In the long run, the government may wish to see rates come down, but that is unlikely to appeal to cash-strapped councils. ‘Once you start reducing business rates you are reducing your income,’ says Joanne Pitt of Cipfa.

A study last year by the CCN, suggested that 100% retention would mean county councils are worse off, while district councils and London boroughs benefit.

Borough councils in London are losing RSG for a pilot in 2018/19 while the Greater London Authority negotiated away RSG and transport grant under a pilot that began last April.

Guy Ware, director of finance at London Councils, says the new pilot will show how councils work together in managing an infrastructure investment fund, but is more limited than if they could vary business rates. 'We are not achieving full devolution but we’re showing willing and hopefully will get some good out of it.'

And there is still the question of national redistribution. London Councils forecasts that local authorities across the capital will hand £2.8bn of the £7.9bn collected in business rates in 2018/19 to the Treasury to support councils in the rest of England.

A National Audit Office report last March estimated councils gained an extra £388m during the first three years of retaining half of business rates. Progress towards 100% retention has been slow, it said, due to appeals by businesses over their rating valuation as well as civil service cuts.

Liam Booth-Smith, chief executive of the think tank Localis, says business rates cannot be looked at in isolation and the ongoing fair funding review, looking at the relative needs of councils, will help determine any long-term solution. 'If you just tinker with the system you are going to create more problems than you solve,' he says.

That could be some way off. In the meantime, councils hope the prospect of keeping all business rates year-on-year does not disappear over the horizon, with the pilots ending up as little more than an accounting exercise.

The journey to 100% business rate retention:

2013: Councils in England start retaining 50% of business rates
2015: Spending review promises councils will retain 100% by 2020. Pilots allowing councils to retain 100% of business rate growth launched in Cambridgeshire and Greater Manchester
2016: Government launches consultation on 100% retention
2017: (April) Further pilots start in other city regions and Cornwall, (June) Local Government Finance Bill lost due to general election, (Dec) Government promises councils will retain 75% of business rates from 2020/21
2018: Ten further pilots start, mostly in two-tier areas.

This feature first appeared in Local Government News magazine. To sign up for your own free copy, please click here.

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